Pfizer 2005 Annual Report Download - page 43

42 2005 Financial Report
Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
For disclosure purposes only, we estimated the fair value of
employee stock options, as required under GAAP, using the Black-
Scholes-Merton option-pricing model and using the assumptions
as described in Note 14E, Equity and Stock Plans: Share-Based
Payments. The following table shows the effect on results for 2005,
2004 and 2003 if we had applied the fair-value-based recognition
provisions of SFAS 123 to measure stock-based compensation
expense for the option grants:
(MILLIONS OF DOLLARS, YEAR ENDED DEC. 31,
_____________________________________________________
EXCEPT PER COMMON SHARE DATA) 2005 2004 2003
Net income available to
common shareholders
used in the calculation
of basic earnings per
common share:
As reported under
GAAP(a) $8,079 $11,357 $3,906
Compensation
expense—net of tax(b) (457) (574) (541)
Pro forma $7,622 $10,783 $3,365
Basic earnings per common
share:
As reported under
GAAP(a) $1.10 $1.51 $ 0.54
Compensation
expense—net of tax(b) (0.06) (0.08) (0.07)
Pro forma $1.04 $1.43 $ 0.47
Net income available to
common shareholders
used in the calculation of
diluted earnings per
common share:
As reported under
GAAP(a) $8,080 $11,356 $3,907
Compensation
expense—net of tax(b) (457)(574) (541)
Pro forma $7,623 $10,782 $3,366
Diluted earnings per
common share:
As reported under
GAAP(a) $1.09 $1.49 $ 0.54
Compensation
expense—net of tax(b) (0.06)(0.08) (0.08)
Pro forma $1.03 $1.41 $ 0.46
(a) Includes stock-based compensation expense, net of related tax
effects, of $107 million in 2005 (of which $70 million related to
Restricted Stock Units (RSUs) and a nominal amount was a result
of acceleration of vesting due to our new productivity initiative),
$38 million in 2004 and $34 million in 2003.
(b) Pro forma compensation expense related to stock options that are
subject to accelerated vesting upon retirement is recognized over
the period of employment up to the vesting date of the grant.
RSUs, which entitle the holders to receive shares of Pfizer stock
at the end of a vesting period, are recorded at fair value at the
date of grant and are generally amortized on an even basis over
the vesting term into Cost of sales, Selling, informational and
administrative expenses, and Research and development expenses,
as appropriate.
Performance-contingent share awards, which entitle the holders
to receive shares of stock at the end of a vesting period, are
awarded based on a non-discretionary formula measuring defined
performance standards. They are recorded evenly at fair value over
the performance period of the award, based on an estimate of
probable performance. They are then adjusted for changes in the
fair value of the shares and changes in probable performance.
2. Acquisitions
A. Pharmacia Corporation
Description of Acquisition
On April 16, 2003, Pfizer acquired Pharmacia for a purchase price
of approximately $56 billion. The fair value of Pfizer’s equity
items exchanged in the acquisition was derived using an average
market price per share of Pfizer common stock of $29.81, which
was based on Pfizer’s average stock price for the period two days
before through two days after the terms of the acquisition were
agreed to and announced on July 15, 2002. Under the terms of
the merger agreement, each outstanding share of Pharmacia
common stock was exchanged for 1.4 shares of Pfizer common
stock in a tax-free transaction. Each share of Pharmacia Series C
convertible perpetual preferred stock was exchanged for a newly
created class of Pfizer Series A convertible perpetual preferred
stock with rights substantially similar to the rights of the Pharmacia
Series C convertible perpetual preferred stock.
Pharmacia’s core business was the development, manufacture
and sale of prescription pharmaceutical products as well as the
production and distribution of consumer healthcare products
and animal healthcare products.
The following table summarizes the components of the purchase
price:
(MILLIONS OF DOLLARS) FAIR VALUE
Pfizer common stock $54,177
Pfizer Series A convertible perpetual preferred stock(a) 462
Pfizer stock options(b) 1,102
Pharmacia vested share awards(c) 130
Other transaction costs 101
Total estimated purchase price $55,972
(a) The estimated fair value of shares of a newly created class of
Series A convertible perpetual preferred stock (see Note 14B,
Equity and Stock Plans: Preferred Stock) was based on the same
exchange ratio as for the Pharmacia common stock and a Pfizer
stock price of $29.81.
(b) The estimated fair value of Pfizer stock options issued as of April
16, 2003 in exchange for Pharmacia outstanding stock options was
calculated using the Black-Scholes-Merton option pricing model
with model assumptions estimated as of April 16, 2003, and a
Pfizer stock price of $29.81.
(c) The estimated fair value of unissued shares of fully vested awards
was based on the same exchange ratio as for the Pharmacia
common stock and a Pfizer stock price of $29.81. Awards can be
settled in cash or shares, at the election of the program
participant.